Why dividing central bankers into hawks and doves misses the big picture

Reducing central bankers to caricatures risks missing the big picture. These days, policy makers have to be more nimble

Central bankers have long been categorized as hawks, who prefer higher borrowing costs to keep a lid on inflation, or doves, who favor lower rates to juice growth. In normal times, these depictions help investors and observers know roughly what to expect policy-wise. But these are far from normal times, and such caricatures are more distracting than enlightening. 
 

Consider India. Last week, the Reserve Bank continued to hold rates steady, as it has since mid-2020. When Prime Minister Narendra Modi’s government replaced half of the six-member panel in October, the lineup was widely judged to be more dovish. This was supposed to be a new-look committee, one that was sympathetic to easing. It hasn’t worked out that way. By comparison, the old guard took an axe to borrowing costs. Not only did the so-called doves stay grounded, the RBI announced it was reining in some emergency policies. On the face of it, the resistance is all the more puzzling because inflation had retreated in the lead-up to the meeting.

Did the doves suddenly become hawks? Unlikely. The RBI did say it was committed to being “accommodative” — rates came down by 115 basis points in 2020 — and will seek to make ample liquidity available. Officials are probably also counting on the government’s big fiscal expansion to do some lifting for them. The move shows central banking in the post-Covid era requires nimbleness and the ability to put ideology aside. Guiding philosophies developed over the course of careers in academia, the government or private sector no longer apply. 

Flawed bird analogies are equally stark when you look at the monetary stances of advanced economies. Esther George, president of the Federal Reserve Bank of Kansas City, has often been characterized as one of the most hawkish U.S. officials, as was her predecessor, Thomas Hoenig. But last week, George said the Fed was still “far away” from achieving its goals and it was premature to mull scaling back its massive bond-buying program. Even Haruhiko Kuroda, the Bank of Japan governor sometimes considered an avatar for permanent easing, looks conservative relative to some of his colleagues. The BOJ has done less new stuff during the pandemic than the Fed or European Central Bank. Yet the BOJ arguably never stopped QE and was a pioneer of zero rates. Does that make Kuroda less of a dove? Does it matter?

Expect the same misleading labels to be thrown around later this year when Fed Chair Jerome Powell's future is deliberated. His four-year term expires in February 2022, but speculation about his standing will begin well in advance, if history is any guide. The chatter tends to be even louder when a Fed boss was appointed by a president of a different party.  

Powell was considered neutral when Trump picked him to replace Janet Yellen. Yet he continued to raise rates through 2018, a pattern that began before Trump denied Yellen a second term. For her part, the former Fed chief was often labeled a dove, yet she presided over the retirement of quantitative easing in 2014 and the beginning of rate hikes in late 2015. Now, as Biden’s Treasury Secretary, she has to sell the president’s proposed $1.9 billion relief package, which has set off inflation alarms for the likes of Lawrence Summers, one of her predecessors. (Summers was once a candidate for Fed chair before withdrawing his candidacy in 2013.) 

Central bankers are more pragmatic than many people give them credit for. Most try to deal with the hands they are given and confront the world as it is, not as cookie-cutter shapes. India came to the pandemic weakened by a banking crisis. Modi’s team has challenged the central bank’s independence more than once. But by standing pat, the RBI has done us a favor. It’s time to wave bye-bye as the flock takes flight.